Banks in $8.5 bln foreclosure abuse settlement

Deal expedites and expands reach of payment to troubled borrowers

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Federal regulators on Monday reached an $8.5 billion settlement with ten banks over foreclosure abuses stemming from the so-called robo-signing scandal, a deal that government officials say is expected to help more than 3.8 million borrowers.

A sign placed by members of Occupy Cincinnati hangs on a door in the East Price Hill neighborhood during a demonstration to protest home foreclosures in Cincinnati, Ohio, March 24, 2012.

The Federal Reserve and Office of the Comptroller of the Currency are still in discussions with four other financial institutions -- HSBC
US:HBC
Ally Financial, EverBank Financial Corp.
EVER, -0.88%
and OneWest Bank.

At issue are deficient practices on mortgage servicing and processing, improper fees, wrongful denial of modification, and the robo-signing scandal -- the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order.

The settlement includes $3.3 billion in cash payments to 3.8 million borrowers, some of whom went through foreclosures.

Banks have agreed to provide an additional $5.2 billion in other assistance to homeowners, such as modifications to their mortgages or cuts to the amount borrowers owe.

Bank of America reaches deal with Fannie Mae

(5:06)

Bank of America will pay $3.6 billion to Fannie Mae as well as repurchase certain mortgage loans made from 2000 through 2008 for $6.75 billion, a move it said would cut its fourth-quarter pretax income by about $2.7 billion. Photo: Getty Images.

The agreement replaces an existing independent foreclosure review process where foreclosed-upon borrowers could request a review of their mortgage foreclosures to see if they are eligible to receive compensation or other remedies because of error. As of the application deadline of Dec. 31 — which was postponed several times to bring more attention to the issue — 495,000 borrowers have requested a review of their foreclosure. An OCC official said that based on the agency’s preliminary data on some of these borrower review cases, only 6.5% have been identified to have errors that would have resulted in financial injury.

Alternatively, the settlement announced Monday is much broader and would seek to provide assistance to more than 3.8 million borrowers, including the 495,000 review-seekers, whose homes were foreclosed upon or were subject to other bank abuses in 2009 and 2010.

The OCC said as part of the deal, the participating banks would end their independent foreclosure case-by-case review and replace it with this approach where payments would go out to eligible borrowers more quickly. Officials declined to break down what each bank will pay into the fund.

Deciding who gets what

Based on the new deal, regulators are setting up eleven categories of borrowers who are most likely to have been harmed. Participating banks will slot borrowers into each category for payouts. A major difference between this approach and the previously employed one is that banks and regulators are not looking for actual errors anymore.

For example, troubled borrowers denied loan modifications will fit into a category of borrower who is more likely to receive greater funds even though regulators did not determine that an error was made. Some borrowers who received modifications but there were errors involved could also receive funds.

If they were in some stage of foreclosure process in 2009 and 2010, it is possible that they could get payment even if there was no error.

Regulators conceded that the complexity of the foreclosure and loan modification processes were delaying and adding significant costs to the review process. An OCC official noted that continuing the review process and determining precisely who was harmed and what exactly was the harm would have been prohibitive and delayed payments to borrowers. He added that this deal will speed up compensation to a broader number of borrowers.

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